Felix Salmon

August break

Felix Salmon
Aug 4, 2011 09:44 UTC

I’m spending this week relaxing in Sweden, taking advantage of the fact that the debt ceiling got raised to drop off the grid for a bit. So here are some things I’ve run across, in no particular order; they’re all worthy of being blogged in more detail.

First, that debt-ceiling bill. Count me in with Larry Summers on this one — it’s the worst of both worlds. Not only are its austerity measures bad for the economy, but they also fail to implement a credible long-term fiscal straitjacket. It’s almost impossible to imagine something messier than this:

Remarkably for a matter so consequential the agreement that the Supercommittee will seek to reduce the deficit by $1.5 trillion comes without any agreement on what the baseline is from which the $1.5 trillion is to be subtracted. Is the $1.5 trillion from a baseline that includes or excludes the Bush tax cuts? Includes or excludes tax extenders and the annual AMT fix? These and other similar questions are unresolved at this moment.

Before the debt-ceiling debacle, we lived in a gruesome a fiscal world characterized by what you might call a permanent temporary tax system. Things like the AMT and the Bush Tax cuts were all implemented with built-in expiry dates — something almost designed to minimize the predictability of the future tax regime. It’s hard to make investments when you don’t know what future taxes are going to be, and the US has the least predictable future taxes in the world.

Now, we’ve made matters substantially worse by adding to that mix an extremely powerful and unpredictable dose of legislative mischief which is certain to come into play every time the debt ceiling is reached. No good can come of this — and no honest credit-rating agency can really have the US on triple-A when this mechanism is going to come up so frequently as a possible means by which the debt will be defaulted on.

What else?

Jeffrey Ely finds a provocative passage by Robert Parker, suggesting that the high prices of 2009 and 2010 Bordeaux might be related to market manipulation by the French. Yes, there’s strong demand from China — but no one really knows how much demand there is, and the chateaux are being extremely quiet about how much of their production they’ve actually sold at the current stratospheric levels. Says Parker:

If much of the 2009s, as well as the 2010s, are not sold through to wine consumers, who are the true marketplace since they actually drink these wines, and then tend to replenish their stock, buttressing the marketplace, then this is a bubble. Despite huge warehouses filled with reserve stocks of great vintages, prices could be set for a major adjustment, just as we have seen in the United States with the real estate market.

Of course, the thing about wine futures is that you can go long, by buying them, but there’s no way of going short. So don’t expect this bubble to burst any time soon, even if it does exist.

Then there’s Andrew Ross Sorkin, who found that one of the chief legal architects of the notorious Abacus deal is now co-chief counsel at the SEC. TED sees no problem here, but I do — while it’s entirely possible that Adam Glass is now on the side of the angels and doing his utmost to close the kind of loopholes that he used to take advantage of, he’s not saying anything and neither is the SEC, which makes it seem that they’ve got something to hide. More transparency, please! If poachers are going to become gamekeepers, they should come out into the sunlight and publicly renounce what they used to do.

I also like this short paper arguing that there comes a point at which more lending and a bigger financial sector is bad for growth, contra the arguments of bankers who always say that restrictions on their activities will hurt the broader the economy.

And Ken Rogoff is fed up with the “Great Recession” meme, saying it obscures the crucial point that we just experienced a financial crisis, and makes it seem that instead it was a large and natural cyclical phenomenon.

Finally, it’s worth revisiting this 2008 column from Charlie Gasparino. In it, he said that stock prices (the Dow was at 8,176, the S&P 500 was at 845) were depressed because markets were rightly convinced Barack Obama was going to raise taxes.

Since then, of course, there have been no tax hikes, but stocks are up about 50%, meaning anybody who bought into Gasparino’s pessimism has lost a lot of money.

I’m only saying this because Gasparino has taken to Twitter to declare that the column was right, that it somehow predicted the 1.3% GDP figure for the second quarter of 2011, and that I was a moron for criticizing the column at the time. It’s also worth noting that since the column was published, Gasparino has moved from CNBC to Fox. That’s all. I report, you decide.


I’m not surprised that the price of high-end Bordeaux is manipulated: it’s a textbook example of a geographically restricted, cartelized luxury market. I’m sure that Bordeaux producers appreciate the growth of wealth inequality, and are acting accordingly. It may be just the scale of the price manipulation that is different now.

The only infallible law in the global economy of luxury consumption is that the higher the price of the product, the more scope is offered for reasonably decent Chinese knockoffs.

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Being wrong on Twitter

Felix Salmon
Jul 28, 2011 23:42 UTC

Earlier today, there was a flurry of activity in the media subcircle of Twitter, based on a tweet from a fake Twitter account saying that Piers Morgan had been suspended from his CNN show. It wasn’t true, as CNN rapidly said, and as Morgan himself confirmed. But various important media people, including most prominently Channel 4 News’s Jon Snow, tweeted the “news” and made it go briefly viral.

Here at Reuters, our official news accounts didn’t touch the story. Our social media editor, Antony De Rosa, did, and then put out a long series of tweets — and even a Tumblr entry — saying that he’d acted too hastily and should have said that the news was unverified. As for me, I retweeted Anna Holmes wondering whether the news was real, and then, literally seconds later, retweeted Brian Stelter saying that no, it wasn’t. Very shortly thereafter, I retweeted Reuters’s Jim Impoco, who made the very good point that “The good news is how quickly that faux Morgan tweet got stomped on.” That’s a point which was also made by De Rosa, who noted that “Twitter is faster than anything at knocking down rumors, faster than TV, web, and obviously print”.

The meta-conversation about how Twitter got it wrong soon became much louder than the original conversation was — and there was a strong thread within it of people, De Rosa included, apologizing for getting it wrong and tweeting inaccurate information. In response, I put up a quick Tumblr post. Twitter is more like a newsroom than a newspaper: it’s where you see news take shape. Rumors appear and die; stories come into focus; people talk about what’s true and what’s false.

There are flagship Twitter accounts, of course, like @Reuters, which have a lot of equity in being right, and where it’s highly embarrassing to be wrong. But the point about social media is that it’s social — as a general rule, it’s people talking to each other, as opposed to declaiming the Truth in a broadcasty manner. I’m happy to be wrong on my blog — one of my personal slogans is that “if you’re never wrong, you’re never interesting” — but I’m even happier to be wrong on Twitter, which is a forum where things disappear quickly and the stream is infinitely more valuable than any individual tweet. I consider my tweets in general and my retweets in particular to be a contribution to the stream; I’m not placing my personal or institutional reputation behind their accuracy.

A few months ago I had a fascinating conversation with Matt Winkler, the editor in chief of Bloomberg News. He’s not averse to Bloomberg journalists being on Twitter, and some, like Lizzie O’Leary, have fantastic accounts with large followings. In her little Twitter bio, she writes that “RTs are not endorsements, dummy” — but that’s not the way that Winkler sees it: his basic point of view is that before a Bloomberg journalist retweets something, she should basically re-report the the entire story. And in the reaction to my Tumblr entry, non-Bloomberg people like Steven Springer seem to think much the same thing.

I don’t have the time, the ability, or the inclination to re-report everything I retweet — and neither does any other journalist with a decent Twitter following. (What’s more, taking everything at face value would remove all the fun from parlor games like trying to work out who’s doing hate retweets, and when.) I do think that it’s probably not a good idea for people like Jon Snow and Antony De Rosa, who are representatives of news organizations and who have large followings on Twitter, to tweet out news without any indication of where it is coming from. If Snow had simply retweeted the @danwooden tweet, or if De Rosa had simply retweeted Snow, then it would have been clear where the information was coming from. Without the retweet, or any link to follow, it looks as though it’s first-hand reporting — and no journalist ever wants their first-hand reporting to be in error.

The high-church media ethicists, however, are having none of this. Dean Starkman, responding to my metaphor that Twitter is more like a newsroom than a newspaper, says that the size of one’s social graph matters:

Twitter’s not a like newsroom because those have four walls, while Twitter’s amplification power is potentially very large. Your “newsroom” has 25,000, sorry, *30,000*, people in it. It’s a lot closer to publishing than being in a closed news meeting.

And Chris O’Shea goes further still:

While some people who tweeted the rumor – such as Anthony De Rosa – went the right route and simply apologized for the error, Salmon took to his blog and basically said it’s okay for journalists to tweet false information…

People obviously make mistakes, but to tweet something wrong and then say, “Oh, well it’s fine” when people follow you because you’re supposed to be a credible news source, is wrong.

If Salmon doesn’t want that responsibility placed on his account, he should remove “Felix Salmon is the finance blogger at Reuters” from his Twitter bio. Until then people are going to give more weight to what he tweets, whether he likes it or not.

Now there’s very little in the way of clear blue water between De Rosa and myself on this issue. We both believe in transparency, and quickly correcting any mistakes you’ve made as soon as you realize you’ve made them, in a public and traceable manner. If I’d simply reported the Morgan rumor as fact, without any kind of sourcing through a link or a retweet, then I too would have apologized. So it’s weird that O’Shea makes such a big distinction between the two of us.

I certainly don’t think that making a mistake and then correcting it is significantly worse than making a mistake, correcting it, and then apologizing for making the mistake. The last step, the apology, is supererogatory — it has to be, lest it be meaningless.

And more generally, one of the great things about Twitter is its immediacy, the way in which people are talking to each other without carefully thinking first about whether or not everything they’re saying holds up to the standards of some grand and noble news organization. That’s something valuable, and it would be a shame if a small group of self-appointed media-ethics priests tried to crack down on it.

Is my Twitter account really “supposed to be a credible news source”? For that matter, is my blog supposed to be a credible news source? I treat neither of them that way. I rarely break news; I’m much more interested in linking to other people who do that much better than I do. People can give my tweets — and my blog, for that matter — as much or as little weight as they like; I have no control over that.

But for the record, and to state the obvious: my blog and my Twitter account are places where I state my personal opinions. There’s a spectrum here; the blog is probably the least personal, then the Tumblr, then the Twitter, all the way to my Foursquare feed, which is accessible only to genuine personal friends. Social media makes obvious what has always been the case: that journalists are fallible humans with opinions. This should be shocking to no one. And that’s something to celebrate, not something to apologize for.


Only skimmed this post was it supposed to be a long-winded defence of not bothering to fact check. I know getting basic facts right is not that popular these days amongst journalists but you might want to write a post about the correlation between that and the declining readership of “real” newspapers.

The scarey thing is how the nonsense that gets cut and pasted then becomes a “fact”.

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The NYT paywall is working

Felix Salmon
Jul 26, 2011 05:45 UTC

Back in April, I was very skeptical that the NYT would achieve its leaked goal of getting 300,000 paying digital subscribers, and I put my money where my mouth was, entering into a bet with John Gapper. John wouldn’t bet me that the NYT would get to 300,000 within a year, so we pushed it out to two years instead. But he needn’t have worried, as Seth Mnookin explains:

It will take years for the ultimate wisdom of the Times’ strategy to be apparent, but the company’s second-quarter-earnings report proves that its digital-subscription plan has thus far been an enormous success. The internal projections have been closely held, but several people have confirmed that the goal was to amass 300,000 online subscribers within a year of launch. On Thursday, the company announced that after just four months, 224,000 users were paying for access to the paper’s website. Combined with the 57,000 Kindle and Nook readers who were paying for subscriptions and the roughly 100,000 users whose digital access was sponsored by Ford’s Lincoln division, that meant the paper had monetized close to 400,000 online users. (Another 756,000 print subscribers have registered their accounts on the Times’ website.)

There seems little doubt that, barring something enormous and unexpected, I’m going to lose my bet; the only question is by how much. Total digital subscription revenues are still going to be a drop in the bucket — if the NYT gets 500,000 digital subscribers at say $200 a year each, that’s $100 million a year, which is a lot of money in absolute terms but still just a fraction of the more than $2 billion that the NYT sees in total annual revenues. Digital advertising revenues alone are running at about $700 $350 million a year. The subscription revenue is nice, but it’s not in and of itself going to allow the Sulzbergers to start paying themselves a dividend again.

Those paying digital subscribers, however, are much more valuable than their subscription streams alone would suggest. They’re hugely loyal, they read loads of stories, they’re well-heeled, and advertisers will pay a premium to reach them. Judging by the second-quarter results, which is admittedly early days, it seems as though total digital ad revenues are going up, not down, as subscriptions get introduced: the holy grail of paywalls.

Mnookin concludes:

As a profession, journalism of the kind the Times practices can be dangerous. And as a business, in a metaphorical sense, more so. You’re depending for your living on the seriousness and high purpose of a substantial segment of the American public. In that sense, the Sulzbergers have always been involved in a fool’s game. The current Sulzberger’s bets have at times seemed the most outlandish, as if he’s willfully refused to read the writing on the wall. But for the Sulzbergers, whatever their faults, even when the paper was making money, it has always been a calling rather than a business. Insisting that people would pay for their content when a consensus of media savants said that they would hemorrhage readership was the work of an eccentric family. Which the Sulzbergers are and always have been. And for now, cross your fingers, it seems to be working.

My fingers are crossed: I was very much a skeptic with regard to the paywall experiment, but I’m extremely happy that it’s working, I’m a big fan of the NYT, and I sincerely hope it has found a predictable and dependable new revenue stream in the volatile and treacherous media business.

I’m particularly glad that the NYT has proven that a very porous paywall can work — one in which just about anybody online can read just about any NYT article for free very easily. The media business has never been about denying access to people who want to read your publication, but the paywalls at News Corp, as well as the one at the FT, are based around that model. The NYT, by contrast, has proven that people will pay even if the paywall is extremely porous.

And in today’s fractured online media environment, the tougher your paywall, the more annoying it is. The NYT paywall is done pretty well, and I still find myself being asked for a username and password on a distressingly regular basis when I’m reading it on the iPad, often when articles come up in an app like Twitter or Flipboard, and I try to use the embedded sharing tools. More distressingly still, entering the password doesn’t always work.

But compared to the FT, the NYT paywall is a dream: not only do I run into the paywall pretty much every time I try to read an FT article on my iPad, I even run into it pretty regularly when I’m on my desktop computer. I’m a paying subscriber, but a very unhappy one: repeatedly typing in a username and password on a touch-screen device is decidedly unpleasant. Overall the user experience at the FT in general seems to be taken straight from the TSA: the general principle seems to be that no amount of customer inconvenience is too much if it makes sure that no unauthorized person will ever be allowed through.

Oh, and one other thing: when I signed up I selected the $4.99 per week option, and the FT helpfully told me that over the course of a year, the total annual payment charged to my credit card would be $259.48. What they didn’t tell me was that I’d have to pay that all at once — and then some: they actually charged me $282.52, after slapping on 8.9% sales tax. (The NYT, by contrast, doesn’t do that: if they do charge sales tax, they don’t break it out, and instead bundle it into the total subscription charge.)

I’ve been getting the physical NYT delivered to my home for well over a decade, which means I pay a lot more for the NYT than for the FT. But I don’t do it in one huge annual chunk, and I don’t feel like I’ve been tricked when I see my credit card bill. As a result, I don’t begrudge the NYT the money I pay them, but I feel much less well-disposed towards the user-hostile FT. And I frankly don’t read the FT all that much, either. I get my news socially, and people simply don’t share FT stories in the way that they do with the NYT. The FT annoys its readers into taking out a subscription; the NYT, by contrast, has persuaded hundreds of thousands of people — it’s overtaken the FT already — to pay for digital-only subscriptions even when they don’t really need to. That’s a much more positive model.

Update: The sales tax question might have been answered! Ryan Chittum points me to the New York State sales tax rules:

If you sell publications that qualify as newspapers or periodicals for sales tax purposes, you don’t need to charge sales tax because they’re exempt. The exemption also applies to charges for electronic versions of newspapers or periodicals if you sell a hard-copy version, and both versions contain the exact same information (except for advertising).

The question here is what is meant by the phrase “if you sell a hard-copy version”. Clearly my subscription to the NYT is exempt from sales tax, because I’m subscribing to the paper version. But what about my digital-only subscription to the FT? The FT does sell a hard-copy version which contains the exact same information — but it just isn’t selling that hard-copy version to me. Is that why they feel they have to charge sales tax?


One reason that the NYT has gotten to that number of subscribers so soon is that they are offering 8 weeks for $0.99. It is irresistible to pay 13 cents a week for something as great as the NYT. Thinking that all of the subscribers are ” hugely loyal, they read loads of stories, they’re well-heeled, and advertisers will pay a premium to reach them” is an overgeneralization. They may well read loads of stories, as I do, but I know that I wouldn’t pay $200 a year to read the NYT online.

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A few Murdoch questions

Felix Salmon
Jul 20, 2011 22:53 UTC

After taking phone calls about Rupert Murdoch on Brian Lehrer’s show this morning and then immediately doing an hour-long diavlog with Alex Massie on the subject, I’m beginning to get a little Murdoch-ed out. But there are three newish points that are worth raising.

Firstly, what was the mechanism by which it was agreed that Rupert and James Murdoch would appear in parliament together? Having James by his side was a godsend for Rupert, and James clearly took his role as a shield for his father very seriously. I’m sure the more aggressive MPs would have preferred to be able to grill Rupert on his own, as they did Rebekah Brooks. How did that not happen?

Secondly, according to Michael Tomasky, there is a strong case that News Corp really could be prosecuted under the Foreign Corrupt Practices Act in the US, were the Justice Department so inclined.

And thirdly, just check out the number of Murdoch defenses on the WSJ op-ed page over the past couple of days:

  • The original, notorious, anonymous op-ed;
  • A paean to Murdoch by Robert Pollock, the WSJ’s editorial features editor;
  • Bret Stephens arguing that the News of the World was less bad than the Guardian and the New York Times;
  • An argument by two former Justice employees that News Corp should not be prosecuted under the FCPA;
  • Holman Jenkins saying that phone-tapping was “tolerated, routine and abetted by official agencies”;
  • James Taranto attacking Joe Nocera’s complaints about the WSJ; and
  • James Taranto, again, the following day, attacking other Murdoch’s attackers, and clamoring for press freedom.

I’m sure that there will be many more to come. But I’m sure this is far from what the Bancrofts expected when Murdoch promised them that the WSJ would enjoy total editorial independence.

Update: Here’s Bloomberg’s Max Abelson on those WSJ defenses of News Corp; he not only did it better than me, he also did it faster.


I think it’s awesome, going through my feed reader, how the raging about News Corp. stops the minute it was revealed The Mirror (and many other non-News Corp. British Papers) was(were) being investigated.

Because the bartender didn’t lie to Hugh Grant and this was being done by everybody.

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Felix Salmon smackdown watch

Felix Salmon
Jul 20, 2011 05:48 UTC

Apologies to everybody here who would normally warrant a whole blog post of their own, but I’m way behind when it comes to catching up on the Felix Salmon smackdowns and so I’m going to clear them all out in one fell swoop, starting with:

Yves Smith, who hates my post on triple-A debt so much that she accuses me of “spending too much time with lobbyists from ISDA and SIFMA”. Her main beef is with my contention that an excess of overcaution was responsible for the enormous demand for triple-A debt. That can’t be true, she says:

If there was “overcaution” you would have seen a wide spread between AAA bonds and lesser-rated bonds.

The first thing to remember here is that there were so many triple-A bonds at the height of the bubble that all the other bonds in the world combined were in the minority. The supply of triple-A debt expanded to meet the demand for it; lesser-rated debt had its own supply-and-demand dynamics and spreads became tight as the Great Moderation thesis took hold.

On top of that, the bond bubble generally was indicative of overcaution: if cautious people buy triple-A-rated debt rather than other debt, they also buy bonds rather than stocks. An overcautious world has too many bonds relative to stocks and too many triple-A bonds relative to other bonds. That’s exactly what we saw.

Yves has her own explanations of the rise in triple-A-rated debt. One is the rise in the derivatives market, which meant a similar rise in the demand for triple-A-rated collateral; the other is regulatory arbitrage, in that under Basel II, banks could hold triple-A debt on their books with zero capital requirements.

Both of these explanations are entirely true, but they’re not really dispositive of my thesis; in fact, both are symptoms of the very overcaution I’m talking about. Collateral is designed to protect you in the event that your counterparty makes bad bets and can’t pay; by asking for triple-A-rated collateral, Wall Street essentially outsourced its diligence to the ratings agencies while being able to say that it had extremely high standards. And the Basel II rules, too, gave triple-A-rated debt a zero risk weighting because they wanted to encourage banks to stay cautious when it came to the quality of their assets.

Next up comes Richard Smith, also at Naked Capitalism, with a very long post taking issue with my very short dismissal of the idea of coin seignorage as a tool to get around the debt-ceiling problem. I should probably explain my position in slightly more detail: yes, there is an argument to be made that coin seignorage is legal and that it could be done without Congressional approval if the coins were made of platinum or maybe palladium. But just because something can be done doesn’t mean it should be done. We shouldn’t rule via loophole, and more importantly, we shouldn’t take monetary policy out of the hands of the Fed and put it into the hands of Treasury. Sometimes, in a crisis, loopholes are the only way to get things done. But we’re not in a real crisis right now — insofar as we’re in a crisis at all, we’re in an utterly fake one. So let’s deal with the root of the problem, which is Congress, rather than trying to ignore it with the use of dangerous loopholes.

Then there’s Brad DeLong, who isn’t impressed with my take on Larry Summers:

Let us parse this:

  1. Summers says that peripheral countries that cannot access the private market cannot repay their debts if the strong countries of Europe charge them high premium interest rates.
  2. Summers says that peripheral countries that cannot access the private market can repay their debts if the strong countries of Europe charge them the interest rates at which the strong countries can borrow.

Both of these statements by Summers seem to me to be true. It is often the case that debt loads that are unsustainable at high interest rates are very sustainable indeed at low interest rates.

But to take a very salient and obvious example, the debt load of Greece is clearly not sustainable, even if it were brought down to German-government interest rates.

Brad also has a clever way in which the ECB can take $10 billion of French and German money and turn it magically into $471 billion of liquidity which could be provided to Italy. But bringing the ECB into this doesn’t help matters: yes, of course the ECB can lend $471 billion to Italy and it could probably do so even without a French and German guarantee. But it won’t, because (a) doing so would be politically impossible and (b) doing so would violate Article 123 of the Lisbon Treaty, which bans monetary financing.

Finally, there’s John Hempton, with his novel thesis that “the last ethical newspaper company is News Corp”, on the grounds that it’s the one company where the proprietor doesn’t ask for journalists’ sources. I’ll leave the rebuttal of this one as an exercise for the reader, I think; I’ll simply note that Rupert Murdoch is perfectly happy dictating his newspaper’s front pages, sometimes with highly embarrassing consequences. Does that sound like a company where the proprietor is assiduously disinterested in his newspapers’ content to you?

Do keep the smackdowns coming. They’re the true essence of blogging.


Yeah I guess I am not clever enough to work out how cash goes down in value. Have you considered a job in financial journalism?

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The Murdochs pass their parliamentary trial

Felix Salmon
Jul 19, 2011 21:22 UTC

The biggest surprise for me, at the Murdoch hearings today, was the lack of political theater and crocodile tears of remorse. I was expecting a ceremonial piling-on — a group of politicians all jumping at a very rare opportunity to tell Rupert exactly what they thought of him, with the billionaire mogul just sitting there and taking the insults, reiterating over and over again just how very sorry he was about everything that has happened.

But that’s not how it turned out at all. The politicians didn’t grandstand nearly as much as their US counterparts are wont to do, and instead asked substantive questions. The Murdochs, for their part, spent more time blustering and denying knowledge of key events at key times than they did apologizing.

The defining moment of the hearing, at least until Rupert Murdoch got pied, was when Jim Sheridan asked him a straight question — “Do you accept that ultimately you are responsible for this whole fiasco?” Rupert certainly gave a straight answer: “No.”

The message, repeated ad nauseam from both Rupert and James, was clear: they’re very important people running very large businesses, and they simply didn’t know what was going on far below them in the News Corp org chart.

I doubt anybody really believes it — not given Murdoch’s longstanding reputation for being a hands-on micromanager where his newspapers are concerned. But in its own way, the Murdochs’ decision to push back against MPs was a show of strength — a clear sign that they were going to fight rather than let this scandal bring them down. Their regular professions of ignorance even with regard to very important questions — whether News Corp is still paying Glen Mulcaire’s legal fees, for instance — were carefully pitched to come across as stonewalling rather than incompetence. James Murdoch, in particular, were quite impressive in his ability to answer questions at length, in borderline-incomprehensible language. As Dan Sabbagh says, he “had facts, information, and answers so long you couldn’t remember (or care) what the question was.”

So I’m with John Abell on this one: the hearing felt more like the end of the beginning rather than the beginning of the end.

But the Murdochs are by no means out of the wood. For one thing, Rupert Murdoch promised that if he were legally allowed to, he would stop paying Glen Mulcaire’s legal fees. That’s big: Mulcaire has been hiding behind a very expensive wall of lawyers for over four years now, and if that wall is taken away from him, he might well have no choice but to tell all. And more generally, the current police investigation into News International is quite likely to reveal an endemic culture of illegality at the News of the World, if not at other News International papers. Beyond that, there’s the very real possibility that US authorities might find evidence of illegal activity on this side of the pond; that would set off a whole new news circus, complete with calls that Murdoch sell off all his news properties.

Tonight, the Murdochs have survived the battle — won it, even, if you take Wendi Murdoch into account. She was the real breakout star of the day. They stood their ground and admitted nothing; given how badly the hearings could have gone, that counts as a win. If you take their answers at face value, neither of them is remotely qualified to run a large organization. But no one is taking their answers at face value. And as a result Rupert Murdoch is likely to continue to run News Corp for at least until the results of the UK police investigation are made public.


“I wonder, could it perhaps be because the committee had to formally “invite” rather than compel the Murdoch’s to appear as witnesses? Or is it simply a difference in culture?”

It’s a cultural thing. British politicians do most of their granstanding during Prime Minister’s Questions, which is televised, rather than committee hearings, which generally aren’t. Also, parliamentary committees are basically powerless, so grandstanding in the US style would come off as rather silly. That isn’t to say MPs don’t play silly games and ask stupid questions (some of the financial crisis hearings were really bad), but they don’t usually monologue just because they like the sound of their own voice in the way Senators do.

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Could News Corp end up in play?

Felix Salmon
Jul 18, 2011 21:03 UTC

The increasingly-fragile nature of Rupert Murdoch’s hold on News Corp has refocused attention on its dual-class share structure. As John Gapper noted last week, such structures aren’t particularly good for minority shareholders like you or me. And if you plug today’s share price into the Breakingviews Murdoch discount calculator, you’ll see that the company is trading at roughly 30% below its fair value. Or, to put it another way, if Murdoch and his voting control were to disappear tomorrow, the shares could jump a good 45%.

Murdoch has a seemingly inviolable 39.7% position in the Class B voting shares of News Corp. No one else comes close: the only other shareholder with more than 2% of the Class B stock is Prince Alwaleed, with his 7% stake. The Class B shares are exactly the same as Class A shares, with the single difference that Class B shares have voting rights at the annual meeting and Class A shares don’t. Both classes of share trade on the Nasdaq; here’s a chart of how they’ve behaved over the past few years. The blue line is the B shares, the red line is the A shares, and the yellow line is the difference between the two. It’s currently about 45 cents per share, down from a high of $2.60 per share in April last year.

Why do the voting shares trade at a premium, if Murdoch always gets what he wants in any case? One reason is that if Murdoch’s successor wants to adopt a single share class, the holders of B shares will want to be paid a premium for allowing that to happen. Another reason is that Murdoch himself is only interested in voting shares: if and when he looks to increase his own shareholding in News Corp, it’s the B shares he’s going to buy, and he’ll happily pay a premium to do so.

But still: the fact is that Murdoch has only about a 12% interest in News Corp, and less than a 40% voting interest. What would happen if an aggressive corporate raider of some description came out with a knockout bid for the company at say $23 per share? Such a bid would come straight out of the Murdoch playbook — it’s how he bought Dow Jones. And even if Prince Alwaleed stuck loyally to Rupert’s side, the rest of the voting shares could end up approving the deal.

What’s more, under News Corp’s certificate of incorporation, the holders of A shares do actually have a vote in the event that there’s a vote on a takeover bid which would change control of the company. (See section 4(a)(i)(C).)

News Corp would not last long in its present format were any takeover bid to prove successful: it would surely be chopped up and sold off in pieces. But that just makes it that much more attractive to corporate-raider types — there’s a pretty predictable going rate for the cable, TV, and movie-studio assets, and even the newspapers would likely spark an interesting bidding war. I can certainly see Roger Ailes easily lining up funding to buy Fox News and turn it into an independent company.

None of this is exactly likely — for one thing, there are precious few bidders out there with the wherewithal to raise $60 billion or so in takeover funds for a media company. In its decision today to put News Corp on ratings watch negative, S&P didn’t say anything about the risk of a leveraged buy-out. And frankly you’d need to be more than a little crazy to enter into a hostile takeover bid against Rupert Murdoch.

But there’s one final twist here: Rupert Murdoch is adamant that he doesn’t actually control 39.7% of the Class B shares. Indeed, his personal holding is decidedly modest, at just 1.3% of the Class B shares. The other 38.4% belongs to the Murdoch Family Trust. Here’s what the proxy statement has to say about all this:

Cruden Financial Services LLC, a Delaware limited liability company (“Cruden Financial Services”), the corporate trustee of the Murdoch Family Trust, has the power to vote and to dispose or direct the vote and disposition of the reported Class B Common Stock. In addition, Cruden Financial Services has the power to exercise the limited vote and to dispose or direct the limited vote and disposition of the reported Class A Common Stock. As a result of Mr. K.R. Murdoch’s ability to appoint certain members of the board of directors of Cruden Financial Services, Mr. K.R. Murdoch may be deemed to be a beneficial owner of the shares beneficially owned by the Murdoch Family Trust. Mr. K.R. Murdoch, however, disclaims any beneficial ownership of such shares.

If Murdoch’s children — the beneficiaries of the Family Trust — come to the conclusion that either they won’t or that they don’t want to inherit News Corp as a monolithic entity, then it’s conceivable that even Murdoch’s own stake in the company might not automatically vote against a compellingly high bid. Certainly a break-up and cash-out would make the fraught question of who inherits what a lot easier: at the moment there’s quite a lot of tension surrounding the question of what exactly will end up going to Murdoch’s two youngest daughters.

All of this is highly speculative, of course. But it’s definitely going to be worth watching Murdoch’s parliamentary testimony tomorrow quite carefully. If it turns out to be something of a disaster, and he loses the support of his independent directors or his family, then all of News Corp might start being in play.


Also News International is the British version of the great vampire squid!

Goldman’s has a revolving door with people in government in the US, whilst NI has does the same in the UK….

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Rupert Murdoch vs News Corp shareholders

Felix Salmon
Jul 18, 2011 14:36 UTC

Bloomberg is sounding out News Corp’s independent directors, and they’re not happy:

Independent directors of New York-based News Corp. have begun questioning the company’s response to the crisis and whether a leadership change is needed, said two people with direct knowledge of the situation who wouldn’t speak publicly…

News Corp.’s independent directors, who hold nine of 16 board seats, have expressed frustration over the quality and quantity of information they’ve received about the scandal and concern about management’s ability to handle the crisis given how slowly the company has responded, the person said.

Some directors said Murdoch, the company’s 80-year-old chairman and chief executive officer, appeared to be in denial over the fallout from the scandal in an interview he gave last week to the Wall Street Journal, one of News Corp.’s newspapers.

And that’s not all: in another article, Bloomberg says that even parts of the Murdoch family are turning on its patriarch:

Some people close to the Murdoch family and News Corp.’s directors said last week they thought it would make sense for Murdoch to relinquish his job as chief executive officer and stay on as chairman.

Independent directors constitute the majority of News Corp’s 16-person board, and so in theory have significant power over Murdoch’s future. If they are talking about “a leadership change,” shouldn’t that help boost the depressed News Corp share price? Instead, it continues to fall today.

There are two reasons why the massive Murdoch discount built in to the News Corp share price refuses to go away and indeed is increasing. First, the markets still don’t believe there’s a real chance he’ll actually relinquish his position as CEO. And second, he’ll still control the company even if he does.

“Rupert Murdoch controls the votes of the company through the Class B shares,” Elson said in an interview. “He can just replace them if he wants. They may do something, but it will be temporary. Maybe he becomes chairman, but this is still his company and he can do what he wants. When he controls the stock, he controls the board.”

My feeling is that the markets are being a bit too pessimistic here. Murdoch lives to control his company, it’s true, but he also knows that real control comes through his ownership of Class B shares, rather than through his office as CEO. If his directors and even relations — along with his crisis managers at Edelman — start telling him that it might be time to install Chase Carey as CEO, the pragmatist in him might be tempted. Especially if the tough questions about him refuse to go away, which seems like a reasonable base-case scenario for the time being.

That wouldn’t necessarily mark the last time that a Murdoch ran News Corp, either. Given his control of the voting shares, Rupert could still install his daughter Elisabeth as CEO in future.

How much of a Murdoch discount would be reasonable at a company where Rupert was chairman, Carey was CEO, and Elisabeth was being groomed to replace Carey? Some kind of discount would still exist — but a much smaller one, I think, than what we’re seeing now. If you think that Rupert’s job is in peril, then maybe News Corp shares are a buy at these levels: in a weird way, at this point, the worse the news for Rupert, the better the implications for his company’s shareholders.


what if the tainted truths are self-reinforcing? Fox News isn’t exactly hurting for business.

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News Corp’s future

Felix Salmon
Jul 15, 2011 22:15 UTC

The abrupt departure from News Corp today of Rebekah Brooks (early) and Les Hinton (late) is yet more proof that News Corp is flailing around and incapable of getting out in front of the phone-hacking story. It’s a bit like the way in which the cost of bailing out Lehman Brothers would rise by a few billion dollars an hour at the height of the financial crisis in 2008: every day of bluster and delay just makes this crisis worse for News Corp and for Rupert Murdoch.

If the News of the World had been shut and Brooks and Hinton both defenestrated back in 2009 when the hacking allegations first surfaced, that would have been more than enough to signal that News Corp was taking them seriously, was saying that such behavior was unacceptable, and was drawing a firm line under an unfortunate and illegal episode. Now, however, such actions only serve to make News Corp look even more guilty — especially since the time gap between the resignations served to draw the story out over two news cycles and makes the whole thing look ad hoc and teetering on the back foot. There’s now a clear sense that the virus is moving up and across the News Corp org chart, from the News of the World to News International to Dow Jones, with no sign that its virulence is diminishing.

Next up: the show trial on Tuesday, where James and Rupert will be ceremonially roasted by various UK MPs. If they express only contrition for what happened, without accepting personal responsibility or admitting any culpability, the reaction will not be pleasant: Rupert, in particular, is known as an assiduous reader and manager of everything that goes on at his newspapers, and he can’t credibly plead ignorance of what they were doing. Similarly, James spent two years hand-in-hand with Les Hinton covering up the hacking and approving seven-figure payoffs to victims designed to keep them quiet. Indeed, his plan to cover up the wrongdoing rather than come clean might even have worked, were it not for the tireless reporting of Nick Davies at the Guardian and the unexpected revelation that the hacking affected not only politicians and celebrities but also the victims of personal tragedy.

On the other hand, any admission of personal responsibility will certainly result in calls for that person to resign. The loss of Brooks and Hinton is personally painful to Murdoch, but it’s not remotely sufficient, at this point, to satisfy the pitchfork-wielding mobs. As Jack Shafer says, “everybody who ever had a grudge against Murdoch for his journalistic crimes, his battles against unions, his acts of political skullduggery, and his brilliant business innovations has sharpened and fixed bayonets to oppose him.”

Which is why I suspect that the endgame will involve both James and Rupert falling on their swords, with the pragmatic technocrat Chase Carey taking over as CEO of News Corp for the time being. Rupert won’t give up his Class A shareholding, of course, and would continue to wield enormous power and influence behind the scenes. Eventually, the time will be right for Carey to give way to Elisabeth Murdoch, one of News Corp’s most expensive hires: the company paid $674 million to bring her on board by buying her company, Shine.

Neither Carey nor Elisabeth Murdoch has any particular love for newspapers; if the Dow Jones special committee starts causing nuisance, or if News International needs to be sold, they’re perfectly capable of letting that business go. Television is where the big money is, and neither of them wants to see News Corp’s global TV ambitions permanently derailed by a bunch of tabloid hacks. Murdoch’s empire might well yet be inherited by one of his children. But that empire might well be very light on newspapers. Actions like spending $5 billion to acquire Dow Jones, which never made economic sense, are now a thing of the past. Rupert’s top lieutenants — and his children, too — understand that. And Rupert himself, at this point, has very little choice but to come around to their way of thinking.


Maybe our country (the US) will soon be cured of the FAUX cancer that has been afflicting her the last 15 years.

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